Less red tape, more integration needed
• Harmonisation of regulatory environments is the key to setting up development in Africa
The benefits of intraregional trade are well documented, yet Africa remains the least integrated continent in the world. Integration would allow for the creation of larger markets to enable players to take advantage of economies of scale, as well as increased competitiveness, specialisation and innovation.
It’s no wonder therefore that increasing intra-African trade is the subject of many of the continent’s initiatives at regional and national level. The African Union’s Agenda 2063 sets as one of its goals the doubling of intra-African trade by 2022.
In SA, the Trade Invest Africa programme was launched to target the increase in exports to the rest of Africa. Currently, 40% of SA’s exports go to Europe and only 25% to the rest of Africa.
One of the main reasons for persistently low levels of intraAfrican trade is high costs. There is abundant anecdotal evidence indicating that it is cheaper to import goods from outside the continent than from within.
A big driver of these high costs is the lack of harmonisation of border controls and regulation. According to studies conducted by the Cross-Border Road Transport Agency, multiple checks on both sides of the borders, varying customs requirements, and differing quality and product standards, all lead to delays and uncertainty for businesses moving goods across Africa’s borders.
Businesses in the UK are grappling with similar issues as they weigh up the implications of Brexit. Baker McKenzie’s report, The Realities of Trade after Brexit, developed in conjunction with Oxford Economics, highlights some of the concerns in the UK that are also faced by businesses operating within Africa.
One big issue is “hard borders”, which means goods are exposed to new costs (tariffs and custom duties) each time they cross a border. Nontariff barriers are also a challenge as they result in a multiplicity of compliance paperwork and other administrative requirements, such as differing licensing and categorisation of products.
Existing customs simplification regimes that are working well and that may provide useful examples for the UK and African countries include the EU border between Norway and Sweden. These two countries have agreed on a one-stop shop for customs paperwork, allowing them to check goods on one another’s behalf. Technological advancements such as scanners for automatic number plate recognition have also helped cut border delays.
Further, the US and some of its neighbours have a “preclearance” system in place at certain foreign airports and ports whereby US customs and immigration officers are stationed to enforce US laws for people headed to the US, which then removes the need to go through customs on arrival.
Some regions in Africa have similar systems in place. Last October, the Kenya Revenue Authority announced that cargo imports into Kenya would be declared on a centralised tax system in the country.
The East African Community adopted a single customs territory system in 2014 to reduce delays. SA’s customs modernisation programme was implemented a few years ago and the new preferred trader programme was introduced in SA earlier this year.
There is also a real lack of good quality physical infrastructure in Africa, especially road and rail networks and efficient transport corridors. This adds time and further increases the cost of trade deals.
To deal with this, the Trans Kalahari Corridor, a road network spanning about 1,900km across Botswana, Namibia and SA, was opened in 1998. The corridor has promoted crossborder trade and traffic as well as economic co-operation between these countries, but other corridors in Africa have been less successful.
In 2016, the Programme for Infrastructure Development in Africa estimated that corridor inefficiencies in the African Regional Transport Infrastructure Network cost more than $75bn a year and that this was reducing intraregional and international competitiveness in Africa. It recommended that all Africa’s transport corridors should be converted into smart corridors, which use technology to improve roadway efficiencies, to reduce these costs.
The development and improvement of the physical infrastructure connecting Africa, in all sectors, but particularly in transport, energy and telecommunications, are necessities for greater African integration. However, implementing crossborder infrastructure projects also has its challenges. The lack of harmonisation of regulatory environments, for instance, can cause lengthy delays.
In a recent case study involving a gas pipeline in West Africa, several areas of regulation needed to be harmonised for the deal to be accomplished. This was dealt with by intergovernmental agreements and the project, from conception to first delivery, took 23 years.
The deal was heavily over budget as a result. What was meant to be a $400m project, eventually came in at close to $1bn. The project also struggled to attract private sector financing and had to be funded by the governments involved, with some support from the World Bank through guarantees.
Clearly, regional harmonisation is key to growth in Africa. There is a need for regional bodies, such as the regional economic communities, to play a greater role in driving this harmonisation.
Establishing regional bodies that have teeth to impose sanctions if national governments don’t adhere to intergovernmental agreements is important. There should be a balance between national interest and regional interest. And too many and overlapping regional bodies could lead to regulatory arbitrage in that countries could pick and choose which regulations they want to adhere to.
Other challenges to greater harmonisation include concerns about surrendering sovereignty.
Evidence suggests that within a certain region, the larger economies tend to dominate and benefit the most. SA has the most intraregional trade of the other members in the Southern African Development Community. This means that there might be reluctance on the part of the smaller economies to pursue greater integration. As such, value supply chains in Africa must be created so that smaller economies will also have something to contribute to the whole.
Funding regional infrastructure is also a challenge. The private sector is reluctant to get involved in trans-border projects because of the level of complexity and risk (particularly the regulatory risk), so these deals must primarily be funded by development finance institutions, export credit agencies and multilaterals.
Apart from providing funding, these institutions also have a key role to play in derisking the transaction through their earlystage interventions and helping national governments establish harmonised regulatory frameworks. For example, Nepad’s (the New Partnership for Africa's Development’s) infrastructure project preparation facility funds cover the prefeasibility aspects of infrastructure transactions.
A truly integrated Africa would create a growing, thriving continent, with trade flourishing. Harmonising its regulations, removing barriers to trade and improving infrastructure links are challenging, but the rewards will be invaluable.
Okosi is a partner in the banking and finance practice of Baker McKenzie Johannesburg.